A conservative nature, an excessive aversion to risk and a strong reluctance to venture outside their comfort zone to do business are holding Canadian businesses back from seizing enormous opportunities in Asia. This author, a Canadian who has done extensive business across Asia has strong advice that, taken, could pay off in new business and a solid footprint in the world’s fastest growing markets.
“The Canadian image of the Pacific Ocean was as a boundary, not a pathway.”
Honourable Jack Austin, retired senator and president of the Canada-China Business Council
Canada is a nation of harvesters – we toil the soil of our forefathers – both above and below the ground, harvesting our natural resources to sell to foreign growth economies, often with very little value-added. We trade with familiar markets that are figuratively close to home – those belonging to the Anglo Saxon and European nations of our forefathers – looking south and east, but rarely west, to the Pacific.
In 2009, 71 percent of Canada’s Foreign Direct Investment (FDI) and 85 percent of Canada’s merchandise exports went to the U.S. and Europe. Of the 6.5 percent of Canadian FDI in Asia Pacific, about 40 percent ended up with our cultural cousins in Australia and New Zealand. A little over nine percent of Canada’s merchandise exports were shipped to Asia proper (about a third to China – mostly foods, woods, and minerals). Canadian merchandise exports represent less than one percent of total imports for Asian countries. On the other hand, Asian exports accounts for about 20 percent of Canada’s imports. Canada’s services trade with Asia is immaterial relative to merchandise exports. The result – an ever growing Asian trade deficit for Canada.
Asia represents over 35 percent of global GDP and accounts for over 50 percent of world GDP growth. While Asia’s economic growth was historically export driven, Asian economies are now increasingly emphasizing local consumption in order to drive economic growth. When it comes to generating goods and services revenue in Asia, Canada is invisible. While Canada’s historic U.S. and European markets will continue to be material consumers, their relative scale is declining in favour of Asia. Yet Canadian businesses continue to underperform in Asia and are failing to be competitively relevant in those markets, markets that will drive revenue for decades to come. This has dire consequences for Canada’s commercial sector and the economic prosperity of its citizens.
Canada should take little consolation from the fact that it is not unique in failing to be as competitively successful in Asia as it has been in its home region. Dr Alan Rugman (currently Professor of International Business at the Henley Business School of the University of Reading), conducted research that showed that the vast majority of Fortune Global 500 companies are really only successful in their home geographic region. Of the 11 Canadian corporations on the 2010 Fortune Global 500 companies, only three – Bombardier, Onex, and Manulife – derive more than ten percent (but less than twenty) of their global revenue from Asia while five of the other Canadian corporations do not even document Asian revenue figures in their annual reports. Multinationals consistently fail to effectively adapt the core competencies that made them successful in their home region and struggle to overcome the ‘liability of foreignness’ when addressing culturally dissimilar environments. But American, European and Australian multinationals are actively overcoming the obstacles and have succeeded in becoming more competitively relevant in Asia than their Canadian counterparts. It is incumbent upon Canadian business leaders to figure out how to move up the league tables in Asia relative to their Western multinational competitors. Given that people of Asian descent currently comprise more than 11 percent of Canada’s population, Canadian businesses should have some advantages on which to draw.
Do Canadians care that their businesses underperform in Asia?
Unfortunately, Canadians, in the safe, secure, protected environs of Canada, and surrounded by easy-to-sell natural resources, seem not to care. There is no active constituency in Canada promoting a greater focus on Asia. There is no momentum from an academic, political or business perspective, as there was with NAFTA in relation to the U.S., for greater discourse with Asia. In 2007, Andrea Mandel-Campbell, a Canadian journalist with 10 years experience in South America, wrote in her book, Why Mexicans Don’t Drink Molson that Canadian companies are not succeeding on the global stage. She outlined a range of remedies to address Canada’s shortcomings. While her book received many good reviews, public and private reaction was muted, and little has changed.
Sun Life Financial is an example of a typical Canadian company that, despite initial success in Asia, has been outflanked by more aggressive competitors. Sun Life was one of the first Western life insurance companies to write insurance business in Asia – in 1891 in Japan, followed in 1892 by Hong Kong, China, Singapore, Malaysia, India, and over the rest of the decade in Indonesia, Thailand, Philippines, China, Vietnam, and Korea. Sun Life Financial was in Asia before almost every other Western insurance company, including today’s current leaders in Asia, AIA (formerly part of AIG), Prudential plc, AXA, and Manulife, established operations. War, nationalizations and the erection of regulatory barriers all took their toll as Sun Life (and other multinational insurers) exited most of these countries. But as Asian markets were deregulated, particularly after the 1997 Asian financial crisis, Sun Life remained preoccupied with the allure of the culturally familiar and highly competitive U.S. market. Sun Life Financial has made limited investments in China and India, but it failed to make the necessary sustained, long-term commitments to Asia. As a result, its strategic options as a competitively relevant multinational across Asia have dwindled over the years as more committed multinational competitors passed them by. Sun Life’s web site boasts of its “International Executive Team,” which in reality is composed of Canadians, Americans and Irish, while its November 2010 analyst presentation highlights that it is the only Canadian insurer in India, as if its only competitors internationally are other Canadian companies. Canadian stock analysts fail to recognize that in growing Asian economies, all companies can show growth in revenue and profits (particularly in the insurance sector, with recurring premium from historical sales) and that they should be assessing multi-year trends in relative competitive positioning. Today, Sun Life is a marginal player across Asia relative to the more committed and competitively significant American, British, Dutch, French, German, and Swiss multinational insurers. Those with knowledge of the insurance sector in Asia also wonder whether Manulife has lost momentum and will follow the path of Sun Life.
Canadian business leaders must set their sights higher
Canada’s business leaders need to raise their game to an international standard (in this definition, international DOES NOT equate to the United States). One could argue that many Canadian managers have been sheltered from developing more worldly ‘street smart’ business skills since for too long they have been: order takers for minerals, fuels, wood, and agricultural produce, whose prices are established on commodity exchanges; home to branch plants of American firms where transfer prices are established internally; and in many cases, have been protected from international competition altogether by federal or provincial regulations and marketing boards.
Compared to Canadian businesses, American corporations display much greater confidence and ambition when they venture into Asia. Some may see this as arrogance and ignorance, but confidence and ambition have proved to be key factors in their greater competitive relevance in Asia. European corporations, given the culturally diverse environment of their home region, appear more comfortable than their Canadian counterparts with the ambiguity, fluidity and apparent lack of orderliness that are part and parcel of operating in fast developing Asian markets. While Canada is justifying its hyper conservativeness and the fact that such prudence allowed it to emerge unscathed from the global financial crisis, American and European corporations are regrouping and redoubling their efforts to extend more deeply into Asian markets. Canada’s corporations, whether they are in financial services, transport, heavy machinery, telecommunications, large project engineering/management skills, or other sectors, have an opportunity to seize the brand for sustainable business growth. This would be an attractive proposition in Asia, but they must overcome their distaste for risk (by learning to fully comprehend and manage challenging risks). Otherwise, Canadian corporations will find themselves stranded at the bottom of the next growth curve.
Close the knowledge gaps to build business in Asia
While there are many considerations for building and managing a business in Asia, key initial steps to overcome the knowledge gaps that appear to inhibit Canadian corporation’s strategic commitments to Asia include:
1. Diversification of the board and corporate management team
Individuals subconsciously bias their decisions in favour of alternatives with which they are most familiar and comfortable. Asian markets can appear overwhelming, complex and very foreign, and therefore risky, to someone who has not lived and worked in Asia. Thus, in Canadian boardrooms, Asia is routinely rejected in favour of investments targeted to the United States or Europe. To illustrate, Canada’s top five banks each report no material revenue from Asia in their annual reports. But a review of the backgrounds of all 144 members of the boards and corporate management teams reveals that 98 percent are of Western, extensively Anglo Saxon (Canadian, American, UK) heritage. Just eight executives happen to have some notional experience in Asia in the form of a childhood prior to immigrating to Canada; 12 to 18 month stints in Japan (in two cases), or in another case, an executive who managed operations in Asia from Singapore. Just one bank has a director who is actually based in Asia — Scotiabank. It also has three of the seven other directors / corporate executives with experience in Asia. There is a conspicuous lack of practical first-hand Asia experience in Canada’s banking boardrooms and corporate management teams. Contrast this with Australia’s fourth-largest bank, ANZ Bank, which has a total of six board members / executives, including the CEO, who have extensive working and living experience in Asia. Generally, the experience on most boards and corporate management teams in Canada reflects, almost exclusively, work experience in North America only, with the result that investment opportunities in Asia are hastily dismissed as “too risky.”
2. Recognize that “You Do Not Know What You Do Not Know”
Over the course of their careers, CEOs and top executives gain skills and experiences to support their continued rise in their corporation. Confidence in their own abilities is stock-in-trade for these professional business managers. However such self-confidence is also applied to business situations outside the manager’s experience – situations when they should instead be seeking knowledgeable advice. This happens frequently when there is a CEO transition in Asia. The incoming expatriate CEO, full of confidence, discounts the value of the outgoing CEO’s experience and fails to adequately debrief and learn from him or her – only to repeat the predecessor’s mistakes. Together with staff in Canadian consulates and trade development offices around the world, we never cease to be amazed that capable business leaders do not solicit the advice of those based in the foreign markets they are entering. Too often, incoming executives “do not know what they do not know” and pursue a course of action based on their own limited experiences and/or ethnocentric mindsets. They need to leave their preconceived ideas at home and seek advice from people who have been living and working in the local Asia markets. After all, there are more than 200,000 Canadians living in Hong Kong alone – working for multinationals of every nation.
3. Select Advisors with Care
If home office or newly arrived-to Asia executives do indeed seek advice, they often turn to the management consulting brands in their home countries that they are familiar with or occasionally, to the management consulting firm’s relevant Asia office. However, purchasing local advice based on a global brand can be a waste of time and money, or worse, it can tip the business in a foolhardy direction. Due diligence based on the individual consultant’s experience is essential for finding capable advisors in Asia. It is also a step that is often skipped. As outlined in our book, Extract Value From Consultants: How to Hire, Control, and Fire Them, less than a handful of the so called “global consulting firms” have sustained the necessary decade-long investments to build robust consulting practices in Asia. Few consulting firms have the multi-service capability that is even remotely comparable to their capabilities of those in North America. Western consulting partners, biased by their Western mindset, often arrive in Asia without bothering to adapt their consulting approach to accommodate Asian approaches to learning, communication, project execution, business management, and change management. Even when based in Asia, such partners require years to become truly effective. Few Western expatriate partners have been willing to commit to Asia for that period of time. To illustrate, the Toronto office of one global consulting firm has seconded at least four Canadian partners to Hong Kong to support client revenue opportunities at different times over a ten-year period. Yet, the Hong Kong practice remains stillborn to this day due to the lack of partner continuity. Such a consulting practice is often the go to point for Canadian executives that buy based on a familiar brand without doing the appropriate due diligence in Asian markets.
4. Be Aware of Expatriate Management ‘Agency’ Issues
The role of an expatriate executive is not an easy one. It comes with significant authority over all components of the business; a team of Asian staff that has the cultural tendency to provide unquestioned respect based on a title, and who expect executives to personally make many more decisions than they would in a Western context; a requirement to deal with much greater levels of detail across many functional areas; regular interactions with government regulators, executive counterparts of competitors, the media, and a host of others demanding a piece of their time; unrelenting travel schedules; and on-going demands from head office, usually in the form of late night conference calls. All of which amounts to a significant level of responsibility and stress. And just when the expatriate executive is feeling a little more comfortable and in control of their environment, usually after three or four years, they are transferred to another country operation, or enticed to another company by a persistent head-hunter.
With this relatively short tenure in each role, expatriates’ approaches to managing can be quite different to that of their Bay Street counterparts. Their focus shifts from medium / long-term to short-term knowing that unlike their counterparts in Toronto home office, they are unlikely to bear the consequences or reap the rewards of longer-term decisions. Decisions often involve weighing up maximization of personal rewards (opportunism) against what is best for the corporation – and most times, corporate performance metrics emphasizing short-term revenue will ensure a short-term view is taken. Thus, business plans and initiatives reflect the incentives of the expatriate executive and could underplay what is required to develop a sustainable and capable leadership team, establish a broad-based employee development curriculum, and build more robust process and systems foundations. Canadian corporate management must take agency issues into account when using expatriates in management positions, both in terms of relying on them as the sole source of information about ‘Asia’, as well as the sustainability of business plans, initiatives, and performance within that operation in Asia.
Fortune favours the bold
Comprehensive understanding of Asia from within the boardroom on down, as well as comprehension of the limits of what may be communicated from Asia, is critical to fully appreciate the true nature of the risks that so often cause Canadian corporations to back away from opportunities in Asia. Canada is fortunate to be well endowed with natural resources, to be located next to an economic superpower, and to be able to draw upon a European cultural heritage. Often overlooked though is the fact that Canada also has many opportunities given its geographic proximity to Asia, a proportionately large number of Asians, and the widely held perception that it is an open, hospitable, and stable nation to conduct business with. To seize these opportunities before it is too late, Canadian business leaders must heed the Latin expression, fortes fortuna adiuvat (“fortune favours the bold”), and overcome their conservative tendencies, shrug off the reluctance to operate outside of their comfort zone, and proceed aggressively to build and maintain competitive relevancy in Asia.